A. The Basics
I. Introduction: Basic Concepts
1. Participating in the Economy: Types of business associations
There are numerous ways of organising work. It is up to the entrepreneur to choose the form of business association to meet his needs. Factors to consider include the need to raise capital, one’s desire to retain control, issues of liability and taxation concerns (we will not be dealing with these latter issues). Note as well that a business may change its form of association throughout the life of the business. A company that begins as a sole proprietorship may become a partnership (whether the regular form or the stranger lawyer-related LLP), or a corporation, and a corporation may become a business trust, depending upon the needs of the investors and those responsible for the management of the business. You might also get tax advantages.
Assets – liabilities = equity (worth of the business).
2. The market as a meeting of the minds
2.1. How can one raise money?
The securities business is a right to participate in market economy. So you have your economic entity that wants to make money. In order to get started, you need some capital to buy tools, hire employees, whatever is needed.
There are two main ways to do that:
· debt capital (you borrow the money, that’s on the liability side)
o Debt is good, but not too much, of course (or you’ll be overleveraged).
o The lender has a right to get his money back, and this money is rarely lent for free (interest, it’s an economy activity for the lender).
o It generally generates a direct rate of return.
o From a technical treatment, tax-wise, the interest is a deductible business expense.
o It can be secured or not. But even if it is unsecured, it ranks in front of shareholders. It can take different forms (bank loan, note, bond, debentures).
· Share capital (get it from the shareholders, on the equity side).
o Share (or units of partnership/trust) capital seems safer but financial theorists say that some loans make it more efficient.
o The shareholder has no guarantee (about their investment or in case of bankruptcy) – though sometimes the shares can be redeemable.
o The shares are retractable (they can be sold back to the company)
o There is generally no direct rate of return (no right to get dividends).
o There’s also a very important voting issue: shareholder are the only one who get to vote (as they are the owners).
o The price of a share is function of the demand: when people want shares, they go up. And vice-versa, of course[1].
o Capital market is the place where financing meet opportunities, voilà.
2.2. Where can one raise money?
2.2.1. The market
The trade market includes two submarkets:
· the primary market, where the shares are first issued[2]12, s. 25, 53 SAO). , worth only about 10% of the whole market. This is the heavily regulated prospectus market (see p.
· the secondary market (or after-market), where the shares are later traded, re-sold of the shares, whatever happens after the initial sale.
o This is where the analystsare. They are assigned to watch a particular stock and comment to the public on it (and have heavy influence).
o You also have intermediaries (brokers, see below). They know the market and can play it easier than
will get sold. Liquid market is good because more people = best (or more accurate) price, and whatever you want to sell will be sold. She calls it a virtuous circle: the better the market, the more people are attracted to it, the more liquidity, the better, etc.
3. The Actors
3.1. Market participants.
· Brokers and brokerage companies, whether real or electronic are the one who are authorised to put your orders on the markets. They are the professionals; they are licensed to do that. Otherwise, it’d be chaos.
· And the dealers, who buy or sell a security for its own account and at its own risk and then charges the customer a mark-up or mark-down.
· There are finally in large institutional shareholders, such as pension funds or mutual funds, who have billions of dollars to invest daily. They do a big pool for people who don’t want to take decisions and make them for them.
[1] E.g. Tim Hortons is “overbooking” shares. Sooner or later, there will be a problem with this. Dotcom bubble. Part of the strategy is to create demand, which demands (haha) the creation of some sort of scarcity.
[2] You can have an angel (i.e. a wise and successful investor that will help you with your start-up), ask FSTTQ or CDP for financing, but if your financial needs dictate it, you might have to go public, i.e. ask the public to help out.
